How Will the Fed’s Taper Actually Affect the Economy?
There is a difference between perception and reality — especially as it relates to the Federal Reserve, the economy, and interest rates.
Perception: The common perception reflects a belief that Quantitative Easing (QE) — the Federal Reserve’s bond buying program — has artificially stimulated the economy and financial markets through lower interest rates. The widespread thinking follows that an end to tapering of QE will lead to a crash in the economy and financial markets.
Reality: As the chart below indicates, interest rates have risen during each round of QE (i.e., QE1/QE2/QE3) and fallen after the completion of each series of bond buying (currently at a pace of $85 billion per month in purchases). That’s right, the Federal Reserve has actually failed on its intent to lower interest rates. In fact, the yield on the 10-year Treasury Note stands at 2.94 percent today while at the time QE1 started five years ago, on December 16, 2008, the 10-year rate was dramatically lower (~2.13 percent).
Sure, the argument can be made that rates declined in anticipation of the program’s initiation — but if that is indeed the case, the recent rate spike of the 10-year Treasury Note to the 3.0 percent level should reverse itself once tapering begins (i.e., interest rates should decline). Wow, I can hardly wait for the stimulative effects of tapering to start!